Electronic payment instruments, and the marketplaces they serve, are becoming the preferred method of payment for small transactions. Historically, merchants required a minimum transaction amount before conducting a transaction with an electronic payment instrument such as a credit card. As customers came to demand that merchants conduct more small transactions with credit and debit cards, merchants kept lowering the transaction minimums until eventually they eliminated them altogether. Today, electronic payment is almost universally accepted even for purchases under a dollar.
New markets are also developing that have significantly increased the volume of small transactions. Most business to consumer transactions conducted on the Internet use some form of electronic payment. Some popular Internet commerce sites make individual songs, videos, articles, etc., available for download for a small fee (e.g., a dollar or less per downloaded song). Electronic payment is also becoming the preferred way to complete transactions on Internet auction sites, such as Ebay. A significant portion of these auctions are completed for small transaction amounts (e.g., the winning bid is less than five dollars, less than one dollar, etc.), generating increasing volumes of small electronic payment transactions from these sites as well.
Innovations in point of sale technology are even increasing the number of small payment transactions in stores and shops: Supermarkets are installing automatic checkout lanes that allow the shopper to scan and pay for goods electronically, without the assistance of a cashier. Most gas stations now have pay-at-the-pump technology that allows a customer to purchase gasoline electronically at the gas pump. Large retail chains are experimenting with radio-frequency identification (RFID) tags on goods and contactless payment instruments carried by the customer, which automatically process a transaction when the customer carries his or her purchase out of the store. These technologies not only increase the share of transactions conducted by electronic payment systems, they also make it faster and more convenient to buy single items and small amounts with electronic payments, increasing the numbers of small electronic payment transactions. Unfortunately however, as the number of small transactions being generated by Internet commerce and new point-of-sale technologies continues to grow, the transaction processing costs incurred by the merchant or auctioneer increase because processing costs represent a larger percentage of these transactions.
Most of the costs associated with electronic payment are fixed regardless of the transaction. These costs include the cost to build and maintain the payment network infrastructure, cost to administer the payment network, and cost to transmit, store, and report the transactions conducted on the network, among other costs. Because these fixed costs do not vary with the size of an electronic transaction, the fixed cost to execute 1000 transactions for a dollar each are 1000 times the cost of executing a single transaction for a thousand dollars. These added costs can jeopardize the economic viability of businesses whose sales primarily consist of large numbers of small transactions, like the increasingly popular music downloading businesses being established on the Internet. Thus, there is a growing need for new payment methods and systems that reduce the relative costs of small transactions that are completed with an electronic payment.